Euro Market Open

Euro, British Pound Break with Risky Assets, Fall Against US Dollar (Euro Open)

Thursday, 29 January 2009 05:16:20 GMT  |  Ilya Spivak, Currency Analyst

The Euro and the British Pound slid close to a percentage point apiece against the US Dollar despite a close to 2% advance on Asian stock exchanges, inverting the risk aversion dynamic that saw the greenback gain as a safe-haven asset on falling equities. Another volley of dour Euro Zone economic data is set for release in European hours, with German unemployment set to rise by the most in over 3 years while EZ business and consumer confidence falls to record lows.

Key Overnight Developments

• New Zealand Cuts Interest Rates by 1.50%, Trade Gap Widens
• Japanese Retail Trade Falls -2.7%, Most in Four Years


Critical Levels



The Euro dropped as much as -0.7% against the US Dollar in overnight trading having failed on another intraday test above 1.33. Prices were testing the 1.31 level ahead of the opening bell in Europe. The British Pound also lost ground against the greenback, shedding as much as -1.1% to test reach a low of 1.4116. Interestingly, the US Dollar rebounded all the while risk appetite appeared to continue to advance with the MSCI Asia Pacific index of stock performance up as much as 1.9%, inverting the risk aversion dynamic that had the greenback showing a strong inverse correlation with equity markets. While it is certainly much too soon to infer anything concrete from this observation, the market may be hinting at a shift in underlying themes driving USD going forward.


Asia Session Highlights



New Zealand’s Trade Balance report showed the deficit widened to –NZ$5.6 billion in the year to December as exports grew just 4.5% from the previous month, the lowest in nine months. Overseas sales of dairy products, which make up a fifth of all outbound shipments, fell a whopping 12%. Exports would have fallen even more if not for a temporary boost courtesy of the sale of a large aircraft that brought in NZ$148 million. Withering global demand has weighed heavily on the smaller antipodean nation, with the widening trade gap set to shave off an increasingly large portion off overall gross domestic product just as New Zealand grapples with the first recession in a decade. The Reserve Bank of New Zealand slashed interest rates by 1.50% today, with Governor Alan Bollard saying, “News coming from our trading partners is very negative. Given this backdrop it is appropriate to take the cash rate to a more stimulatory position and to deliver this reduction quickly.” A wider deficit also puts downward pressure on the New Zealand Dollar: if imports outpace exports, there is a net outflow of money out of New Zealand and into the market, making the currency more abundant and depreciating its value.

Japan’s Retail Trade reading fell -2.7% in the year to December, the lowest in close to four years. Shrinking global demand has pushed companies to cut back production capacity and boosted unemployment, weighing on consumer spending and depressing overall economic growth. Looking ahead, things continue to look bleak for the world’s second largest economy: yesterday, the International Monetary Fund said global economic growth will come to a “virtual standstill” in 2009 to yield just 0.5%, and lowest yet in the postwar period. Such a scenario is likely to substantially prolong the economic downturn for heavily export-oriented countries (Japan included). Indeed, the monthly report from the Bank of Japan asserted that “economic conditions are likely to continue deteriorating for the time being.”

Related Article: New Zealand Dollar Drops as RBNZ Unexpectedly Slashes Rates by 150bps to Record Low; U.S. House of Rep. Passes Obama's Stimulus Package


Euro Session: What to Expect



Another volley of dour Euro Zone economic data is set for release in European hours: German Unemployment is set to rise by 30k, the largest in almost three years, following an 18k rise in the preceding month. Rising unemployment will weigh on consumption, the biggest component of overall economic growth. Indeed, Consumer Confidence for the regional bloc is set to fall to -31, the lowest ever recorded since the survey was started in 1985. Shrinking domestic and overseas demand is expected to push the Business Climate Indicator to 23-year low at -3.50 as companies anticipate falling revenue. Overall Economic Confidence is expected to fall to 65.4, a new all-time low.

Despite clearly deteriorating conditions, the European Central Bank is increasingly likely to keep interest rates on hold in February. ECB President Jean-Claude Trichet hinted as much while speaking in at the World Economic Forum in Davos, and overnight index swaps agree, leaning towards no change in borrowing costs in February and just 25 basis points in easing over the next 12 months. Still, expectations of interest rate cuts crept 6.42% higher from yesterday, possibly hinting at the idea that a slowness to act now will prolong recession in the Euro Zone and a need for greater easing later.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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